Precise planning and calculation are necessary for undertaking any task- PEST Analysis
Precise planning and calculation are necessary for undertaking any task, be it going on a road trip or starting a new business. And for planning, some tools always come in handy to give the best possible outcomes. This method can be used to examine the situation you might find yourself in the future and attain a decision in a particular time frame. One such tool that is extremely important for planning any business, or in fact, for any activity that can be deemed necessary is PEST Analysis.
Let’s get into the details of what PEST analysis, how to do it, and how it benefits you in setting up your business.
What is PEST Analysis?
Let’s make it clear in the very beginning, PEST analysis has nothing to do with the harmful animals and plants that are often found on grasslands and farms. PEST is an acronym that stands for Political, Economic, Social, and Technological factors that an entrepreneur must keep in mind while setting up her/his business. These factors are critical to be analysed as these have decisive power of influence over any business’s organizational decision making and running.
Similar to PEST analysis is SWOT analysis – it is the analysis of Strengths, Weaknesses, Opportunities, and Threats of a business.
PEST analysis is done as a part of an external examination when conducting a strategic market analysis or research. It takes into account the various macro-environmental factors that need to be considered for a company. In simple words, it is a strategic tool to understand market growth or decline, business conditions, operational potential, and direction.
Components of PEST Analysis
As mentioned above, PEST is the acronym for the political, economic, social, and technological factors of the business industry. Naturally, these four elements form the components of the analytical process. They are explained below:
Political
In political factors, the government’s intervention in the economy and functioning of businesses is considered.
For example, political issues that impact businesses primarily include tax policies, labour laws, environmental laws, trade barriers, taxes, and political stability.
Political matters may include goods and services that the government intends to provide or provide. Moreover, government policies also impact a country’s health, education, and infrastructure industries.
Economic
Economic factors affecting a business majorly consist of economic growth, exchange rates, inflation and interest rates. These factors have a plausible impact on the functioning of businesses work and their decision-making processes.
For example, interest rates affect a company’s capital expenditure and its growth and expansion. Exchange rates can impact the value of exports and supplies and the value of imports.
Social
Social factors include facets of cultural and moral awareness, population growth rates, age limits, occupational outlooks, and safety protocols. Strong trends in social factors affect a company’s demand for its products and business.
For example, an aging population could mean a smaller and undesirable workforce, which will end up increasing labour costs. Moreover, businesses adopt different management strategies to keep up with emerging societal trends, like increasing racial and gender diversity in the workplace.
Technological
Technological factors comprise technical aspects that impact a company’s activities like R&D, automation, and technological transformation.
For example, technological changes in an industry can affect a company’s existence in the market, the minimum level of costs, and influence the hiring decision. Technological changes also impact costs, quality, and innovation in a business.
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The best part about the PEST analysis is that it doesn't require anything that you can't find sitting right on your study table-a pen and a sheet of paper.
Why is PEST analysis critical?
As we have already established, immense planning and analysis go into setting up a business. And a plethora of parameters need to be checked off the lists to ensure a safe, reliable, and impactful landing of a new business in the market.
And, well, PEST analysis is one such tool to help in the process because it:
Helps assess the suitability of your business strategy for the wider environment and stimulates strategic thought process,
Considers all external impacts affecting your organization,
Pushes for a more transparent and more insightful decision-making process, and
Enhances the planning, marketing, organizational transformation initiatives, sales and development, project management, and research methodologies.
As PEST analysis gives a greater understanding of your company and business proposition, it leads to more effective long-term strategic planning. It leads to heightened attention to potential threats and dangers while providing insights for valuable business opportunities.
Political Factors
(Politically influenced factors that could impact the store)
- Municipal Permissions
- Opening/Closing Timings
- Goods Delivery Permissions
- Permissions for selling particular goods (essential medicine, liquor, etc.)
- Environmental impacts by your store (if any)
- Funding for your opening your store
- GST rates and policies
Social Factors
(Social dispositions, behaviours, and trends that influence your organization and target market)
- Business contribution to the community
- Employee health
- Leisure time for labourers
- Customer relations and general behaviour
- Trends and awareness
- The sensibility of community ties
- Population in the area
Economic Factors
(Overall economic forces that could impact your business)
- Growth rates
- Seasonal business
- Demand in the area
- Labour costs
- Raw material costs
- Capped monetary investment
Technological Factors
(Technology that can impact the way you produce, distribute, and market your products and services)
- Competitors technology
- Online transactions
- Telephones and communication
- Automation
- Email services to customers
- Digital Presence (website/application)
These are just examples of what might impact retail stores’ setting in the political, economic, technological, and social senses.
After you have done the PEST analysis, you need to ask the right questions that originate out of each of the four columns:
Political Factors: What is the government’s policy or political party that can hamper or boost your business? Is the political climate stable, or will it change?
Economic Factors: What financial factors will affect your business in the future? How are you doing financially now? How does this affect sales and prices?
Social Factors: How do customers believe, value, and relate to your sales practices? What role do cultural rules and human behaviour play in your business?
Technological Factors: What technologies and inventions are available or ongoing? How will this technology impact your business?
You need to analyse and consider the PEST analysis outcomes and plan with the possibilities of how potential changes are affecting the company in the future.
To get the most out of PEST analysis, you should collect suggestions and reviews from multiple sources and people. Gathering other people can be difficult, inconvenient, and expensive when you work with a large or dispersed team. Various technologies, such as video conferencing, networking, and brainstorming platforms, can help address these challenges.
Who can use PEST analysis?
PEST analysis can be used for any business or even event management purposes. As it helps establish the external factors that could impact decisions, it gives a detailed overview of a fool proof plan.
It can be used by new businesses, as shown in the above example. It can, and is, also be used by conglomerate companies that produce a wide range of products, like Reliance Industries or Disney, to maintain inter-departmental coordination and research for further growth. College students can even use it to organize fests and events to understand better the impacts of such events on society, the college, and the students.
You can also use it to analyse an organization’s internal structure to identify strengths and weaknesses in the company’s internal law, economic outlook, climate, and technical framework. The results of this analysis may facilitate change or adaptation in areas considered below average.
Thus, PEST analysis can be used at any organizational level in any suitable scenario.
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PEST can be used to analyse an organization's internal structure to identify strengths and weaknesses in the company's internal law, economic outlook, climate, and technical framework.
Applications of PEST Analysis
After the process is completed, the application is a critical part of the procedure. You can use PEST analysis to identify and utilize existing business environmental conditions. It can also identify current or future challenges to plan on how to manage these challenges effectively.
PEST analysis can be combined with other business strategy analysis forms, such as SWOT analysis, to obtain more complete results. Comparing these completed analyses provides an excellent foundation for making correct decisions.
Shortcomings & Limitations
Depending on PEST factors’ dynamic nature, many of the elements analysed can change within an hour or a day. Some factors are based on assumptions and may not be accurate. The data collected is too large; it must be used with caution. Its accuracy cannot always be ascertained again because it is obtained from multiple outside sources.
Nevertheless, PEST aspects impact strategic business decisions like marketing activities, product development, and research projects. And the analysis helps entrepreneurs make better business decisions and improve efficiency by studying the factors that can affect their business.
